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Tesla & SolarCity: Exploring the Solar System

A lot of attention has been paid to the Tesla / SolarCity merger, and for good reason. We’re talking about two companies that both have difficult economics and tough operating profitability. To some, it feels like SunEdison’s ill-fated acquisition of Vivint.

Here’s where the two are different. SunEdison acquired Vivint to augment its portfolio of renewable generation businesses, doubling down when the entire portfolio was weakening financially due to growing risk and changing market valuations. Musk is making a product play, first and foremost, rather than a financial portfolio play. In the end, there’s a big difference.

A portfolio play falls apart if financial markets or sentiment turn. A product play can buy time from long-term investors if a compelling vision can be sold. This is what Musk began teeing up at the end of October: a product vision.

Musk’s combined unveil of a solar roof and Tesla’s Powerwall battery is solar + storage packaged as a modern home energy management system that gives homeowners new levels of independence and control. It’s an integrated solution that will ultimately combine EV charging, a sexy new solar roof product, a platform for demand management, and software to allow consumers to control the whole shebang. Perhaps Musk only announced parts of that in October, but that’s where it’s going.

He’s going to wrap the offering in Tesla’s brand and foment product lust, much like Apple does with its products, to the benefit of pricing premium. He’ll sell that to the upper end first, as he did with Tesla, and move down the chain. (It’ll be Tesla’s brand because SolarCity doesn’t have the brand to pull it off. For most consumers, SolarCity is a transactional installer and financing agent, not a product company.)

Here’s why the above strategy is important to Tesla, SolarCity and clean energy generally.

The adoption of residential solar faces a headwind in advanced markets as we exhaust the army of those who are willing to take a 20-year bet to contribute their part to the greater good. To be fair, this market is fueled by a lot more than environmentalists who want to feel virtuous; it’s also an economic decision. Nonetheless, the economics (and thus the decision) get a lot shakier if rate structures change or net metering gets called into question, as it has in a number of places, most notably Nevada. Both prospects tend to emerge and strengthen the farther along solar gets in penetration of a given market.

A home energy system (which marries solar with storage, EV charging and software) solves a lot of the problems. We move from a solar-only play that might exhaust the ranks of those willing to absorb risk to make their contribution, to a product for those willing to pay for independence and control. By adding storage, Musk also logically addresses the increasing problem of solar saturation in advanced markets.

SolarCity will keep selling solar installs, and Musk will keep talking up his solar roof as a new, sexy, high-end product. Catnip for wealthy technophiles. We’ll hopefully hear more about energy independence, islanding and personal grids as chic products and status symbols.

If the Tesla playbook is any indication, Musk will play the high-end market for a couple years and then move downstream as the cost of storage (one of the biggest BOM cost drivers) declines.

On the battery front, it’s worth pointing out that Tesla is going to start getting used batteries back from their cars in growing volume. Musk will be able to use those to bring the cost of the system down for the broader market, just when he needs to do so.

There’s certainly a lot of conjecture there, but it’s a reasonable conclusion.

For what it’s worth, we’re also starting to see the redefining of energy product play out elsewhere. The game is moving away from solar as the sole focus. The inverter companies are starting to make hay about their role as the anchor of energy management systems. We’re seeing products like SmartFlower and SolPad that are looking to productize integrated capabilities into new, compelling consumer offerings.

Of course, there are a lot of complex factors in how it all develops. The overriding bet here, though, is that we’re seeing the start of a market shift. A shift from solar as the product to a more holistic offering in which solar is an anchor feature—but not the only feature.

As we transition, you can bet the game and market will ultimately favor the solutions with the most sex appeal, delivered through storytelling, brand and software. Tesla holds a strong hand on all fronts. Others will emerge.

Thank Brian for the Post!

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